INHOUSE INSIDER Forum, News, and Career Center for In-House Counsels

Looking back, 2008 has been quite a year. From foreclosures, the financial crisis, the oil crisis, to the auto industry bailout, the collapse of Lehman Brothers, and the election of Barack Obama. So what can we expect for 2009?

What Are GC’s Planning for 2009? In the course of my discussions with general counsels and CLOs at large and small companies, the talk has been about how to "tighten the belts" in anticipation of a situation they expect to continue well into 2009.

I think that GCs are already making adjustments and some tough decisions about hiring, salaries, promotions, staffing, other investments, etc. to ride this wave of economic decline or at least hold the ship steady for at least another year.

When it comes to projected in-house hires; however, the answer may not be as clear-cut. In-house legal departments are continuing to trim the fat and to cutback on legal expenses. Therefore, while hiring in-house lawyers may be a less expensive alternative to outsourcing the work to outside counsels, it remains an expensive proposition. I suspect that these same companies will continue to first enforce internal cost cutting measures before considering hiring more counsels in-house. These internal cost cutting measures will include:

• Increasing the workload of existing in-house counsels
• Increasing staff hires over attorney hires
• Hiring contract attorneys rather than full time attorneys
• Hiring counsels with multiple skill-set (inc. litigation)
• Capping legal budgets, including compensation (salary freezes, no bonus etc.)

When Will This Crisis End? No one seems to be in agreements on this question, which has been on everyone’s lip. We believe that we are unlikely to see any significant turnaround until late 2009 – of course anything can happen, but 2009 may be a year for counsels to remain cautious about their career prospects.

What Practice Areas Will Rise? Will some practice areas fare better than others in a downturn economy? The answer is generally yes, and the practice areas that traditionally enjoy a boost are litigation, bankruptcy, employment, and regulatory.

General counsels are also anticipating an increase in demand for international legal services as companies continue to expand in Asia and Europe, with many noting a particular demand for securities and antitrust services. An increase in international litigation, including arbitration, is also expected.

Healthcare continues to be a practice area that is “recession-proof.” The industry has been booming and so is the legal hiring. The most demand in healthcare area for attorneys with 2-5 years of experience in healthcare transactional, regulatory, and compliance matters.

Intellectual property, especially in the areas of patents and patent litigation, is also a practice area that fares well in either an up or down economy. In-House Legal Departments will most likely take a critical look in this practice area and bring more patent-related work in-house.

Domestically, we are already beginning to see increases in litigation, bankruptcy, and employment law work related to the economic meltdown. It is also certain that the new administration that takes office in January will instigate far-reaching regulatory reforms that will significantly reshape financial institutions and the capital market, and create new legal regulatory work. In-House Legal Departments will initially need to turn to their outside counsels for assistance, but I foresee an increase in in-house hires with regulatory experience.

That said, it is unlikely, however, that any such up tick in legal activity – regulatory or litigation – will substantially counterbalance the loss of work that will continue to result from the overall slowdown in the economy in general, at least during the first half of 2009.

What About Outside Counsels? Companies will be under pressure to control costs in 2009, and according to a 2008 Altman Weil survey of chief legal officers, GCs are planning to decrease their use of outside firms. Accordingly, 26 percent of law departments will decrease their outside counsel, up significantly from 16 percent in last year's survey. Only eight percent of CLOs plan to increase their use of outside counsel, down from 18 percent. That said, companies are still actively hiring outside counsels – but more cautiously and strategically. This may be a very good year for smaller and specialized law firms that offer high quality work at discounted rates.

What About In-House Counsels? Companies are conducting a thorough analysis of outside billings, selecting practice areas that can be moved in-house, determining the capacity of in-house attorneys to handle the work, calculating the cost of adding in-house counsels, and managing expectations about savings from bringing additional work inside the company. As a result, companies who are hiring additional counsels will be primarily focusing attorneys with a combination of regulatory, corporate, litigation, and intellectual property experience.

If companies are considering growing their in-house legal ranks in 2009, no one has been able to consistently predict how many, when and how. Most surveys and reports provide conflicting results as to the number of companies planning to hire in-house counsels in the coming year.

The Altman Weil survey of CLOs conducted in May/June predicted that 49% percent were looking to bring on new attorneys in the next 12 months. However, during a November flash survey by Altman & Weil on department cost control, only 25% of CLOs said they would add new attorneys.

Although the majority of CLOs will look to do more with fewer attorneys, we predict that about 20-30% will hire additional in-house counsels to handle the additional work in-house, and reduce their outside counsel expenses. (See previous posts, Are GCs Ready to Pay Wholesale Rather Than Retail? and 2009 Predictions for In-House Legal Departments.)

What Will This Mean for Compensation? In-house lawyers in larger companies made an average of $236,000 in pay and bonuses in 2008, up from $226,000 in 2007. But 2009 compensation levels will decline as in-house staffing continues to soften.

Of those companies not cutting lawyer compensation, we can expect the majority of salaries to remain at status quo, and a minority to increase by a lower margin. We expect a maximum 5% increase in base salaries for 2009, over 8% in 2008, and 10% in 2007.

Bonuses will be the hardest hit, and when you consider that in house they make up for nearly 50% of one’s compensation package, this will hurt. We predict very few, if any, bonuses to be paid out for 2009.

What About Outsourcing and Offshoring? Will recessionary pressure to reduce legal costs push more companies to ship work overseas? Despite doubts and controversy, companies are spending more on legal process outsourcing (LPO) every year. A recent report by the Indian business research company ValueNotes estimates that spending on legal offshoring to India doubled from $62 million in 2006 to $124 million in 2007 (See Will Tough Economy Push Companies to Outsource Legal Work? by David Hechler, Corporate Counsel, December 22, 2008).

What about 2009?

The key to an increase in legal outsourcing will not only turn on savings which are considerable – billable rates range from $20 to $40 per hour – but rather on quality. Companies are not only looking for cheap rates, but for quality work that is equivalent to work delivered by U.S. outside counsels. Can LPOs deliver? The answer is yes, for certain type of work that can be commoditized such as research, analysis, and document reviews. Whether LPO’ will be able to deliver on more sophisticated legal projects remains to be seen, but I think it’s only a matter of time before they begin to be competitive on other projects.

In the meantime, legal outsourcing of commoditized work can mean significant savings for a number of companies, and could force law firms to continue to adjust. In an era where CLOs are looking at all kinds of cost saving measures, this is solution that legal departments can’t afford to overlook in 2009.